FINRA seeks to lessen brokers’ oversight of RIAs

Thanks to a new FINRA rule, brokerages should soon be relieved of their current duty to keep tabs on their advisors’ “outside business activities” like bartending, Uber driving and other side hustles.

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And thanks to a recent amendment, they’re also likely to be relieved of any duty to continuously monitor transactions placed by dually registered advisors through unaffiliated RIA firms. 

The amendment targets advisors who work at independent RIAs but remain registered with a brokerage, often so they can sell specific products like mutual funds or annuities. Such advisors became a source of anxiety after FINRA released a March proposal that brokerages complained would greatly extend their responsibility for supervising the trading activities dually registered advisors make through outside RIAs. Ironically, the rule was actually meant to alleviate brokerages’ regulatory burdens.

Possible extension of brokers supervision of RIAs

FINRA’s goal was to relax brokers’ duty to monitor any non-investment related  outside business activities their advisors may have taken on. FINRA has said it wants to “both increase investor protection and decrease burdens on members by eliminating the reporting and assessment of low-risk activities that create white noise (e.g., refereeing sports games, driving for a car service, bartending on weekends).”

But brokerages quickly fixated on the provision that would make them responsible for supervising any advisor who “effects or places a securities order” through an unaffiliated registered investment advisory firm. RIAs were concerned as well, saying the rule could subject them to oversight by FINRA in addition to their current regulation by the SEC and the states.

“Imposition of FINRA Rules, that are in no way related to my business, on only those RIA firms that have person(s) also registered with a FINRA member creates an uneven regulatory environment and serves no purpose other than an unwarranted expansion of FINRA’s jurisdiction,” wrote Charles Kitsman of the advisory firm Kitsman Investment Management in a comment letter dated April 21.

Those anxieties have now been relieved by an amendment FINRA adopted before sending the rule on to the SEC for final approval. Rather than require brokers to supervise transactions that advisors at unaffiliated RIAs enact on behalf of clients, FINRA would require only upfront approvals of proposed trading activity with no ongoing obligation to continue monitoring it.

Brian Hamburger, the founder of the wealth management and regulatory compliance firm MarketCounsel Consulting and The Hamburger Law Firm, said the amended proposal “comes to a very logical place, which properly allocates the risks and supervision obligations to each respective registered firm.”

Hamburger, who represents several large brokerages, added, “In this case, the system worked.”

Andrew Mount, a lawyer representing broker-dealers and advisors at Eversheds Sutherland in New York, said most firms were no doubt glad that FINRA’s original proposal would lighten the obligation to monitor advisors’ non-securities-related side hustles. Many, though, were also hoping for relief in their duty to supervise unaffiliated RIAs.

“A major source of a major source of frustration for a lot of these firms comes from the outside [investment advisor] activities,” Mount said. “The greatest difficulty they have with figuring out how to comply with the rules is with regards to those outside activities.”

The amended version of the rule would go far to clear that up.

“I think this is a pretty big deal for those firms,” Mount said. “I think it will appease their concerns. If it’s adopted as it’s proposed, it’s going to have a major impact on the independent broker-dealers that are utilizing hybrid advisor models.”

A possible hit to brokers’ revenue streams

In a post on LinkedIn, the self-professed Chief Financial Planning Nerd Michael Kitces of the industry consultant Kitces.com, noted the rule change could affect brokers’ revenue streams. Many firms, he wrote, charge a fee, or “haircut,” to pay for the supervisory services they now provide unaffiliated RIAs.

The new rule “ostensibly would make it harder for the B/D to claim that it needs a haircut on outside RIA business when it no longer has the same level of supervisory obligations,” wrote Kitces, who couldn’t be reached for this article.

The SEC will soon open a 90-day comment period on the proposed FINRA rule. Even as broker-dealers have resolved many of their anxieties about monitoring unaffiliated RIAs, concerns still swirl over the prospect of relaxed supervision of advisors’ outside money-making ventures.

Is less monitoring of outside activities good for investors?

In a letter to FINRA on May 7, 2025, then-president of the Public Investors Advocate Bar Association Adam Gana said lawyers representing investors in securities law cases often find that advisors view their clients as sources of financing for their outside businesses.

“Such schemes include all manner of businesses including real estate, restaurants, health care related facilities, equipment, or medications, leasing or equipment companies, film companies, software related companies, and other private equity ventures,” Gana wrote.

Douglas Schulz, a securities expert and the president of Invest Securities Consulting, said advisors with an outside business have a conflict that can put them at odds with their clients’ interests.

“If you have need for capital for your business and you have your clients and you are managing their capital, it’s tempting to say, ‘I want to buy this office building, and I could use some additional investors,'” Schulz said. “So I am critical of lessening the requirements on outside business activities.”

Schulz said he thinks clients who work with RIA advisors registered with separate brokerages often assume those outside firms exercise supervisory duties.

“He’s affiliated with this firm, he probably has it on his business card, yet FINRA is going to say ‘We’re going to change this, and the brokerage is not required to supervise his RIA business,'” Schulz said. “That’s not a good thing.”